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May 16, 2011

IMF Chief Strauss-Kahn’s Arrest for Sexual Assault Roils France

European debt crisis solution complicated by legal woes

The arrest over the weekend for sexual assault in New York of Dominique Strauss-Kahn, head of the International Monetary Fund (IMF), is having repercussions far beyond those to his alleged victim, a hotel maid at the Times Square Sofitel.

According to Reuters, Strauss-Kahn was taken from an Air France flight just moments before takeoff and arrested on charges that included attempted rape. He was on his way to a meeting with German Chancellor Angela Merkel on Sunday to discuss the debt crisis, then would have headed on to a euro zone finance ministers meeting on Monday.

Strauss-Kahn’s arrest complicates matters for Greece, which was believed to be on the verge of receiving another bailout package. It also throws a wrench into the succession at the IMF, where John Lipsky, the second in command, had announced just Thursday his plans to step down from his post in August, but who The New York Times says has now been named acting managing director. It also puts into turmoil France’s 2012 presidential race. Strauss-Kahn was widely expected to be the country’s Socialist Party candidate to run against Nicolas Sarkozy next April.

Speculation has already begun about who will run the IMF long term in Strauss-Kahn’s absence. Lipsky, a former chief economist at JPMorgan Chase and Salomon Brothers in New York, has also represented the IMF in Chile. However, with news of his plans to leave the IMF having already been made public, Eswar Prasad, a professor of international economics at Cornell University, a senior fellow at the Brookings Institution in Washington and a former IMF official, said that the timing could result in an “awkward period.”

Prasad, who worked with Lipsky as division chief of the IMF’s financial studies division, said in a Bloomberg report, “He can carry the ball effectively for the next few months, but I wouldn’t count on anything more from him.” Considering that Lipsky planned to depart the IMF within months, Prasad added, it was not likely that he would launch “major initiatives.” Felix Salmon wrote in a Reuters blog late Sunday that Christine Lagarde of France will most likely get the nod, despite a host of other likely candidates he named in the piece.

But more critical is what will happen with Greece, Portugal, and the ongoing European debt crisis. According to an Associated Press report, Nemat Shafik, a deputy managing director at the IMF, was sent in place of Strauss-Kahn to the Monday euro zone meeting.

An unidentified Greek official said in the report, "This might definitely cause some delays in the short term." Prasad said in the report, "The leadership vacuum at the IMF comes at a highly inopportune time for Europe, which is teetering on the brink of a full-blown debt crisis."

And Peter Cardillo, chief market economist at Avalon Partners in New York, said in a Reuters report, "With the arrest of Strauss-Kahn, there are worries out there ... Does this mean that the IMF will take a harsh look at Greece and Portugal? These are headline fears, and I don't expect it to be a lasting one, but that's weighing on the market today."

At the Monday meeting, finance ministers were expected to back Portugal’s bailout, albeit under new conditions imposed by Finland. It was also expected that euro zone officials will lean on Greece to implement more austerity measures as a condition for more emergency funding.

Reuters reported that Strauss-Kahn had been lionized for making the IMF central to global coping mechanisms dealing with the financial crisis of 2007-9. He had made massive changes at the IMF so that countries worst off from the collapse would be able to get emergency financing, and was key in putting together rescue programs for Iceland, Hungary, Greece, Ireland, and Portugal. He also moved to provide emerging market countries like China, India and Brazil more say in the IMF’s voting structure, and interceded in China’s dispute with the U.S. over currency valuation by pushing China to let its currency appreciate.

Despite his importance to the IMF and on France’s political stage, this is not the first time Strauss-Kahn has been in trouble over a woman. In October of 2008 he apologized to Piroska Nagy, a female IMF economist who was his subordinate, to his wife, and to staff at the IMF over an "error in judgment"—an incident that resulted in an inquiry by the fund’s board of member countries.

While he was cleared of allegations of harassment and abuse of power and remained in his post, it warned him against future improper conduct. Now it too may be subject to investigation over a too-weak response, particularly since there have been, according to Reuters, "persistent rumors about Strauss-Kahn making sexual advances to women." And on Monday a French attorney said that his client, a woman writer, was considering filing charges as well for an incident that occurred in 2002 when she went to interview Strauss-Kahn.